Return of Iran to oil market doesn’t pose any threat to producers

The ongoing JCPOA discussions are being watched by international oil markets closely. The possibility of Washington rejoining the international Iranian nuclear agreement is still in doubt, but the Biden Administration appears to be considering the move. Iran has indicated that it will only rejoin JCPOA if US sanctions on its main economic sectors, namely oil and gas, are lifted.

Some of the analysts are worried about the possible negative repercussions of Iranian oil on global oil supply and oil prices. The current global oil market is gaining stability, but a complete recovery is far from certain. It is only due to Saudi Arabia’s actions that markets have been able to rebound.

One of the main reasons Saudi Arabia has been able to make these unilateral production cuts is that other producers have been kept out of the market. Both Iran and Venezuela have seen their production constrained by international sanctions, while Libya and Iraq are suffering from internal conflicts.

Without these players in the market, Saudi Arabia is able to successfully control oil markets. The lifting of Iranian sanctions under JCPOA deal worries Arab producers, US shale, and Russia. These worries can be termed ‘unfounded’.

Some analysts argue that a JCPOA success could destabilize oil and gas markets, increase price volatility, and even see a return of oil gluts. There is a major flaw in this narrative because it is based on the assumption that the sanctions have successfully removed Iranian oil from markets. It is certainly true that Iranian volumes are no longer at historic highs, but looking at volumes reaching markets, Iranian oil is still very visible.

Oil and tanker trackers have been showing again and again that Iranian oil exports are not only very flexible, but also increasingly aggressively. The IEA reported that China never completely stopped its purchases of Iranian oil. The OECD energy watchdog also said that Iran’s estimated oil sales to China in the fourth quarter of 2020 were at 360,000 barrels a day (bpd), up from an average of 150,000 bpd shipped in the first nine months of last year.

Just before the JCPOA discussions restarted, Iran increased exports to China to around 600,000 bpd. OPEC also reported that Iran's crude oil output increased in March 2021 by 6.3%. OPEC report published lately showed that Iran’s crude output had surged by 137,000 bpd. OPEC data also showed that Iran’s average output in 2020 hovered at 1.985 million bpd, down from 2.356 million bpd recorded in 2019 and 3.553 million bpd in 2018. Major Asian clients in China, India, and elsewhere are much too happy to take Iranian volumes based on their very low price. To forget or diminish the role of Iranian oil at present in the market is a major error.

A JCPOA success would not only threaten oil prices, but could also lead to an increase in Tehran’s revenue base. Currently, Iranian oil export successes are based on illegally or partly “not-known” sales to customers, at lower prices but still generating cash. If sanctions on oil exports are removed, Tehran won’t only see higher export volumes but it will also stop selling its crude at a discount. Iranian oil could, and most probably will, be priced at normal market price levels.

In the short term, a potentially higher revenue stream could be generated, based on higher volumes. At the same time, Tehran should take into account the fact that customers will not be willing maybe to take Iranian volumes at higher prices. The current demand-supply situation doesn’t allow for millions of additional barrels to hit the market.

In the coming months, Iranian volumes will not increase at all, regardless of how successful the JCPOA discussions are.  With overall Iran oil export potential of around 2 million bpd, current exports are estimated around one million bpd, the markets will not be shocked. Demand is still weak, and it is being threatened again as COVID’s 3rd wave in Europe is blocking the opening of markets, and Asia’s emerging giant India is recording an increase of COVID casualties. 

Iran’s oil potential and exports are unlikely to derail the market. Looking at the OPEC plus strategies and cohesion, another one million bpd on the market coming from Iran will not be a shock to the system. The market is not able to take more volumes, while Iranian clients are unlikely to be willing to increase costs. It will be interesting to watch how investors decide to price these events into oil markets. Looking at the current fundamentals, OPEC plus leaders are still the real power players in the oil market.

Can Saudi Arabia and Iran ever initiate direct military confrontation?

Relations between Iran and Saudi Arabia have been tense ever since the establishment of the Islamic Republic back in 1979. Creation of Gulf Cooperation Council (GCC) and support for Iraqi dictator Saddam Hussein’s regime during its 1980-1988 war with Iran became a big thorn. Ties were further strained in 1987 after the massacre of over 400 Iranian pilgrims by Saudi security forces in the holy city of Mecca.

In 2011, as the Arab Spring spread across the Middle East, the breach of mistrust between Tehran and Riyadh grew wider. The civil wars in Syria and Yemen pushed the two sides into indirect military confrontations. Execution of Shiite cleric Sheikh Nimr al-Nimr by Saudi Arabia further worsened the situation.

Indeed, Saudi Arabia’s decision to cut ties with Iran after its diplomatic facilities were stormed by Iranian protesters, with countries such as Sudan, Somalia, Bahrain and Djibouti soon following suit, brought about a novel state in the Iranian-Saudi relationship. In this atmosphere, analysts sat with crossed fingers, exploring can Tehran and Riyadh ever initiate direct military confrontation? Likely the answer was clear; there can’t be a war between Iran and Saudi Arabia, for five main reasons.

First, the administration of Iranian President Hassan Rouhani is pursuing a policy of constructive engagement with the world, the reason Iranians elected him in 2013. In Iran’s complicated political system, the executive and legislative branches are elected by popular vote; though the Guardian Council’s vetting of candidates makes the elections process not entirely free. Within this political system, making a decision to engage in war is not an easy task. Therefore, while some Saudi leaders may beat the drums of escalation, the possibility of outright war depends on factors such as whether there is political will for such action and how the two countries choose to handle the crisis in their relations. Engaging in war is not something that can be done by one side alone. Moreover, Iran’s government has no incentive to increase tensions, as evidenced by the condemnation of the attack on the Saudi Embassy in Tehran by the triangle of power in Iranian foreign policy, meaning Supreme Leader Ayatollah Ali Khamenei, Rouhani and Foreign Minister Mohammad Javad Zarif. In a goodwill effort, Iran also announced that it will continue to send pilgrims to Saudi Arabia. Thus, if Saudi Arabia intends to initiate war, the Iranian public — seeing themselves as victims of a violation — will mobilize, and also gain the sympathy of the international community.

Second, the majority of Iran’s current leaders was involved in war with Iraq and is fully aware of its costs. Rouhani held several military positions during the conflict, while Zarif and his deputies also remember the hardships of that era in their capacity as diplomats. Khamenei, who was president at that time, also served as chairman of the Supreme Defense Council, while Rafsanjani served as the de facto commander-in-chief of the Iranian military. Even Iran’s parliament speaker, Ali Larijani, served as a commander with the Islamic Revolutionary Guard Corps (IRGC). Larijani’s brothers, including incumbent Judiciary Chief Sadegh Larijani, were also involved in the conflict. Many other influential Iranian figures, including a great number of parliamentarians and Friday prayer leaders, also have bitter memories of war. Although the IRGC at times seems to favor showdowns — such as in the cases of the recent detention of US sailors or its surveillance of the aircraft carrier USS Harry Truman in the Persian Gulf — it is not empowered to take arbitrary actions.

Third, the very nature of the current crisis makes war unlikely. According to Charles Hermann, a renowned analyst of issues related to US foreign policy, crisis management and decision-making, what defines a crisis are the three elements of threat, time and surprise. Whether the situation threatens the vital interests of a state allows only a short time for decision-making, and whether it occurs as a surprise to policymakers must all be considered. When it comes to Iran and Saudi Arabia, the nature of their crisis does not meet these criteria. In fact, Saudi Arabia’s tone against Iran has even softened in recent times. Indeed, Saudi Crown Prince Mohammad bin Salman told The Economist, “Whoever is pushing toward [war with Iran] is somebody who is not in their right mind.”

Fourth, on the international level, Saudi Arabia believes that in the event of a military confrontation with Iran, the United States and the rest of the West may side with the Islamic Republic. Riyadh’s decision to cut ties with Tehran has received virtually no international support aside from some African countries that play no significant role in international power equations. Even the then US Secretary of State John Kerry urged calm following the breakdown in the Saudi-Iranian relationship.

Last but not the least; victory is uncertain in a potential Iranian-Saudi war. Saudi Arabia and Iran may take destructive blows from each other, but both know that neither has the ability to destroy the other side or impose regime change. Saudi Arabia has more warplanes and modern military equipment, while Iran has better missile capabilities and military personnel. Riyadh’s involvement in the Yemen war is another factor that reduces the motivation for war with Tehran. Moreover, the population in Saudi Arabia’s oil-rich Eastern Province is mainly Shiite and has the potential to revolt — an advantage for Tehran that Riyadh cannot easily create for itself in Iran. Lastly, Iran’s control of the Strait of Hormuz, through which Saudi Arabia conducts much of its trade, is a further preventative factor, since war would necessitate redirecting all that trade to the Red Sea, which in the short run is just not possible.

Benjamin Netanyahu loses control of Knesset

Prime Minister Benjamin Netanyahu has lost control of the Knesset and may soon also lose the Prime Minister’s Office. Anti-Netanyahu bloc has defeated him in a key vote in the parliament on Monday, thanks to the support of the Ra’am (United Arab List) Party led by Mansour Abbas.

Netanyahu’s opponents succeeded in passing their proposal for control over the powerful Knesset Arrangements Committee, which runs the Knesset until a government is formed. The proposal of Yesh Atid faction chairman Meir Cohen passed by a vote of 60 to 51. Party sources said their victory came following a successful meeting earlier Monday between their leader, Yair Lapid, and Abbas.

“I am thankful to my partners,” Lapid wrote on Twitter. “The victory in the vote on the Arrangements Committee is another step on the way to a unity government in Israel.”

In exchange for his support, Lapid offered Ra’am a spot on the Knesset Finance Committee, chairmanship of a committee on fighting violence in the Arab sector and a deputy Knesset speaker post. But in an interview with Channel 12, Abbas said the posts did not influence his decision.

“We wanted to keep our role holding the balance of power in the Knesset and show we weren’t in anyone’s pocket,” said Abbas, who added he was also angered by the constant attacks on him by Religious Zionist Party leader Bezalel Smotrich, a key member of Netanyahu’s bloc.

Yesh Atid officials said their first goal would be to bring to a vote having Cohen replace Knesset Speaker Yariv Levin, who is the MK closest to Netanyahu. The Lapid bloc’s majority on the committee could help it advance anti-Netanyahu legislation, including a bill that would prevent a candidate who is under criminal indictment from forming a government.

The Arrangements Committee will decide the makeup of the temporary Foreign Affairs and Defense Committee and Finance Committee, which provide oversight over Netanyahu and his government. It will also appoint the Knesset speaker’s deputies, which will allow starting the process of electing a new president.

Netanyahu thought he would have a majority on the committee, due to an agreement between Likud and Yamina. According to the deal, Yamina would receive a second slot on the committee at the expense of Likud, in return for its votes. But then, the Ra’am MKs, who were angered by Netanyahu’s deal with Yamina, came into the plenum and defeated the Likud proposal by a vote of 60-58. That led to the vote on the anti-Netanyahu bloc’s proposal, which Yamina’s seven MKs did not attend.

Yamina leader Naftali Bennett has made a decision to “go with the Left,” Netanyahu said in a closed-door meeting with United Torah Judaism MKs on Monday at the Knesset.

He and Bennett held a tense meeting on Monday, their fifth since Netanyahu received a four-week mandate to form a government from President Reuven Rivlin two weeks ago.

“His feeling is that he has closed a deal over there,” a UTJ MK told The Jerusalem Post after the meeting with Netanyahu.

Earlier, Netanyahu told his Likud faction that a government led by Bennett, whose party has seven seats, would be “absurd.”

“The moment of truth for Bennett has arrived,” Netanyahu said. “He promised not to sit under Lapid, with Meretz and Labor and with the support of the Joint List. He must stop galloping toward a left-wing government.”

In the closed-door portion of the faction meeting, Netanyahu said that what his opponents call a unity government would only bring more governmental paralysis and would be “very bad for Israel.”

Abbas said on Monday that he does not rule out enabling a government led by Bennett, just like he would not rule out enabling a government led by Netanyahu. Speaking with the emblem of Israel behind him, he said it is wrong to call his faction’s MKs supporters of terror, as Smotrich has.

Smotrich meanwhile called on Bennett to decide whether he will be with the Right or the Left. He said he did not believe that Bennett really backs a government that would rely on Ra’am, which he said identifies with Israel’s enemies.

“As soon as it is clear where everyone stands, I am sure a right-wing government of the entire nationalist bloc can be formed,” Smotrich told his faction meeting.

New Hope leader Gideon Sa’ar told his faction that he would not enable Netanyahu to form a government, or initiate a new Knesset race or a direct election for prime minister.

Sa’ar spoke for the first time since Netanyahu called on him to “come home to Likud” in a speech in Ramat Gan on Friday.

“Our view hasn’t changed,” Sa’ar said. “There are two alternatives: A right-wing government led by someone else [besides Netanyahu] or a unity government that will allow New Hope to maintain its worldview. Both options are better than new elections, whether for the Knesset or just for prime minister.”

In an effort to build a coalition, Lapid met on Monday with the heads of Yisrael Beytenu, Labor, Meretz and the Joint List, as well as Ra’am.

Defense Minister Benny Gantz told his Blue and White faction that continued political uncertainty would be dangerous for Israel.

“If we don’t unite among us, we won’t be strong against our enemies,” Gantz said.

Is US opposition of Rampal coal plant due to love for Sundarbans or to keep India away?

During his six-hour trip to Dhaka on 9th April 201, US President Joe Biden’s special envoy for climate change, John Kerry, bluntly raised the Rampal coal based plant issue during his official talks with Foreign Minister AK Abdul Momen.

However, Kerry didn’t raise this issue in his talks with Prime Minister Sheikh Hasina. He did say in a general way that coal-fired power plants are one of the main causes of environmental damage. He drew attention to the US opposition to coal-fired power plants.

John Kerry raised the Rampal issue again towards the end of the talks. “Can I ask an outrageous question? Can you stop Rampal?”

At one point Kerry said that he was confused about Bangladesh’s stance on the Sundarbans. On the one hand it is taking steps to protect the forest, and on the other it is taking up projects like the Rampal coal-fired power plant. “How is this possible”, he asked.

John Kerry was told that Bangladesh has always given importance to environmental protection. Despite resource constraints, various steps have been taken to face the climate change challenge. The protection of the Sundarbans is being given due importance in the construction of the Rampal power plant.

Earlier in 2017, the former US Vice President, environmentalist Al Gore, had appealed to Prime Minister Hasina to halt the construction of the Rampal power plant.

Prime Minister Sheikh Hasina asked Al Gore to visit Bangladesh to see the Sundarbans and see if the project is harming the environment.

In 1997, the United Nations Educational, Scientific and Cultural Organization (UNESCO) declared the Sundarbans as a World Heritage Site.

UNESCO has been raising objections to the project since 2018. A study carried out by UNESCO and the International Union for Conservation of Nature (IUCN) on the project says that it will do irreparable harm to the Sundarbans. This may also cause the Sundarbans to lose its status as a World Heritage Site, UNESCO has repeatedly warned.

There seems also a split within Bangladesh.  The official version is, “The Bangladesh government has taken up various initiatives to protect the Sundarbans mangrove forests.” While some experts say that the power plant will put the mangrove forest at risk but the government is not paying attention to this issue.

It goes without saying that now financial and technical assistance for mega projects is driven by geopolitics rather that economic viability.  Based on this stance, I am ready to say that Bangladesh is being pressurized to give up this project, only because of Indian involvement.

The Bangladesh Power Development Board and India’s National Thermal Power Corporation are jointly constructing the 1,320 MW power plant at Rampal in Bagerhat, next to the Sundarbans.

Opponents of the plant go to the extent of saying that the technology used in the Rampal project is of low standard. They raise a question if in other countries coal-fired power plants are being closed down, why Bangladesh should go for this.

Supporters of the plant say, it is a reality that at present, work on the Rampal power plant has advanced considerably. The government would not be able to do anything about it now, even if objections are raised.

The Bangladesh Foreign Minister, Abdul Momen, highlighted the various steps taken by Bangladesh to tackle threats from climate change and to protest the Sunderbans.

US intelligence agencies playing mantra orchestrated by military complexes

I have often raised this point that the US foreign policy is driven by ‘military complexes’. The survival of these conglomerates is dependent on internal conflicts and proxy wars, often created and proliferated by the US intelligence agencies. 

If presence of weapons of mass destruction in Iraq was the biggest joke of the century, Iran getting ready to attack United States is another point to laugh. If you don’t agree with me read the highlights of ‘The Annual Threat Assessment Report’.

According to The Annual Threat Assessment Report – 2021 prepared by the office of the US Director of National Intelligence (DNI) and sent to Congress three major threats have been identified. These are: 1) China’s push for global power, followed by 2) Russia’s provocative actions and 3) threats from Iran.

DNI’s annual threat assessment reports are shared with congressional intelligence committees as well as the committees on the Armed Services of the House of Representatives and the Senate.

While assessing possible threats from South Asia, the report warned that “under the leadership of Prime Minister Modi India is more likely than in the past to respond with military force to perceived or real Pakistani provocations.”

The report noted that heightened tensions in the region raise the risk of conflict between the two nuclear-armed neighbors, with violent unrest in Kashmir or a militant attack in India being potential flashpoints.”

The report also said that a general war between India and Pakistan during 2021 was unlikely, but crises between the two are likely to become more intense, risking an escalatory cycle.”

Another US intelligence report to Congress, released last week, had warned that India and Pakistan could go to a war in the next five years over real and perceived provocations.

The report pointed out that some regional conflicts – such as the fighting in Afghanistan, Iraq and Syria – had “direct implications for US security,” while “tensions between nuclear-armed India and Pakistan remain a concern for the world.”

The report assessed the prospects for a peace deal between the Afghan government and the Taliban in 2021 as low. The Taliban are likely to make gains on the battlefield, and the Afghan government will struggle to hold the Taliban at bay if the coalition withdraws support, the report predicted. It also noted that Kabul continues to face setbacks on the battlefield, and the Taliban are confident they can achieve military victory.

Commenting on Iran’s role in Afghanistan, the report said that “Iran will hedge its bets in Afghanistan,” adding that “Iran publicly backs Afghan peace talks, but it is worried about a long-term US presence in Afghanistan.”

As a result, “Iran is building ties with both the government in Kabul and the Taliban so that it can take advantage of any political outcome,” the report added.

Walking away from Afghanistan now, is a mistake

A few days back I had posted a blog ‘Joe Biden faces resistance on withdrawal of troops from Afghanistan’. Then I posted another blog ‘Chinese soldiers may enter Afghanistan after departure of US troops’. One of the comments received in response to the second blog was “United States seem to have decided to handover charge of Afghanistan to China.” 

Today, I am posting below a message of Marvin G. Weinbaum, Director for Afghanistan and Pakistan Studies at the Middle East Institute.

The Biden administration decision to disengage militarily from Afghanistan by 11th September 2021 may seem warranted; perhaps even overdue, after a commitment of two decades and spending US$2 trillion. The initial objectives of the US for intervention in Afghanistan were seemingly achieved years ago and its subsequently acquired aims in staying have proved mostly unattainable. But while a full unconditional withdrawal from Afghanistan may appear to be defensible as the US weighs its global threats, the president’s action is nevertheless shortsighted and narrow in its understanding of US long-term security interests. Foremost, it is an “America First” policy that shows callous indifference to the consequences for a current-day Afghanistan that is to a large extent of our making. We are putting in motion developments that will eliminate any remaining possibilities for a negotiated peace, lead to increased violence, undermine a sitting government, collapse the formal economy, and place at risk the hard-won rights of Afghan women and minorities. The stage is also being set for an open-ended, proxy-driven civil war that in creating millions of refugees is likely to destabilize and radicalize the region.

In many ways we have been here before. After the Soviets bailed out of Afghanistan in 1989, the US decided that it had little stake in what happened in the country and the region. Virtually all government assistance ceased. We decided to let the Afghans sort out their differences and left Pakistan, our erstwhile partner in the jihad against communism, to fend for itself in coping with the fallout of the decade-long Afghan conflict. What we got in Afghanistan was a bloody, anarchic, fratricidal civil war, the rise of the Taliban, the settling in of al-Qaeda, and 9/11. In Pakistan, there followed a decade of political instability, an undeterred decision to go nuclear, and a high-altitude shooting war with an also nuclear-armed India that it took the US to help stop. It would have to do much the same three years later to prevent a potentially more deadly, globally impacting conflict on the subcontinent.

If walking away from Afghanistan and the region was a mistake in the 1990s, it is ever so much more so now. The US was not then worried about global terrorism or nuclear proliferation emanating from the region. Geo-strategically, we were unconcerned with having an adversarial Russia, China, and Iran among others filling the vacuum of an American absence. It is misguided to believe that we can compartmentalize our global interests. If tragedy befalls Afghanistan and the region falls into turmoil, it is difficult to believe that the US can expect to realize its objectives in areas now deemed of higher priority. A continued American military presence in Afghanistan small enough to be politically palatable but large enough to contribute to the country’s stability might not seem very satisfying but given the alternatives it might have been the least bad of all possible outcomes. Unfortunately, the Biden administration decision now rules that out.

Pakistan oil and gas production declines during Jan-Mar 2021 quarter

Pakistan’s indigenous crude oil production in 3QFY21 declined to 77,139, down 6%YoY barrels per day (bpd) mainly because of sharp fall of 63%YoY in Makori Deep’s production, followed by 23%YoY decline in Mardankhel and 11%YoY in Maramzai’s productions.

These three fields belong to Tal Block (operated by MOL Pakistan) of which production in total has declined by 13%YoY to 17,840 bpd during Jan-Mar 2021 quarter as against 20,597 bpd during Jan-Mar 2020 quarter.

The decline in production from Tal Block was contained to 13% due to 3%YoY increase in oil production from Makori East (which contributes 54% to Tal Block and 12% to country’s production).

On a QoQ basis, Pakistan oil production was up by 2%.

During 9MFY21, Pakistan oil production declined by 6%YoY to 75,924 bpd due to decline in flows from Makori Deep, Mardankhel and Nashpa fields.

Pakistan domestic gas production declined to 3,550 mmcfd, down by 3%YoY during the quarter under review due to lower flows from Qadirpur, Kandhkot, KPD and Maramzai ranging from 7% to 15%YoY.

Mari field’s production increased by 3%YoY and 2%QoQ as it has replaced Kandhkot field volumes to the National Grid. As a result, Kandkot field volumes have come down by 11%YoY and 1%QoQ.

On QoQ basis, gas production increased by 5% during the quarter due to sharp improvement in flows of Uch Field, rising to 35,013 mmcfd.

On 9MFY21 basis, gas production was down 3%YoY to 3,525 mmcfd due to decline in flows from Qadirpur, Kandkot, and KPD to the tune of 4% to 17%.